Dabur India (NSE:DABUR) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Dabur India (NSE:DABUR) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Dabur India, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = ₹19b ÷ (₹137b - ₹36b) (Based on the trailing twelve months to June 2023).

Therefore, Dabur India has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 18% generated by the Personal Products industry.

Check out our latest analysis for Dabur India

In the above chart we have measured Dabur India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dabur India here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Dabur India doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 19%. However it looks like Dabur India might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Dabur India is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Dabur India does come with some risks, and we've found 1 warning sign that you should be aware of.

While Dabur India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.